Techscape: Skype Beyond the Hype

The Register , 19.09.05

By Bill Robinson

Whitman's future just got dimmer

Comment So Skype got itself sold.

Is this a good thing for the Tech Sector?

Not likely.

Far from joining the throngs lionizing Meg Whitman, I don't think she's going to live up to expectations and if she doesn't, watch out. Her idea to “monetize” Skype by using them as telephonic spam sounds positively insane, not to mention illegal and detrimental to the internet in general, so I like her chances less and less.

eBay's not a bad little business. I say with tongue planted firmly in cheek while holding out the distinct possibility that all is not well there. Being a convicted Contrarian, I don't subscribe to conventional wisdom of any kind. My editor characterizes the above statement and my cynicism as "absurd" and admonishes me that it is a "huge, enormously successful business" and that "the consensus is that it is exceptionally well-run." He also wants me to acknowledge the "success" eBay's had with PayPal and admit that they may produce the same "magic" with Skype. I think the jury's still out on that, so with all due respect that is bollocks.

After all, we have witnessed the glowing press and corporate admiration for Enron as near-to-death as a few weeks, days even. And what of Worldcom? And Global Crossing? These massive ethical implosions were shocking with their speed of delivery and the Tech sector has worse ethics, in my opinion, than the rest of the corporate world. No, I could well be wrong. But I certainly have the right to say what I think. Fact is, nobody would bat an eyelash if these web giants crashed and burned So, I repeat: eBay's not a bad little business - but it is unproven, we don't know what the hell's going on behind the scenes. The fact that it has a ridiculously high market cap or stock price doesn't mean it'll have the longevity of a General Electric or even Microsoft.

Problem is, their best customers, you know the ones that are always online bargaining, selling and buying claiming this is their “new business” seem like such sad little people devoid of a life. This is only my opinion, so if you consider yourself one of these people, don't get your bowels in an uproar. In my estimation, eBay will never get the elite as regular customers and this will leave a glaring gap in their growth plans.

I did get a great deal on a leather couch there and would probably go back if the occasion arose, but am unlikely to spend much time overall on the eBay site. It drives me crazy, like Ikea, you know?

And, pulling a Google like this where they rush headlong into the moral equivalent of paid placement for search results will alienate their current forlorn customers and maybe new potential customers away en masse.

Let me see if I understand this, their new devious strategy is to sell their customer information to all manner of crass midnight and bedroom operators at $2 to $12 per lead, I mean invasion of privacy. Oh, that's a good idea. I don't know about you but I definitely don't want any of my vendors/suppliers to pass on my details to anyone. This just does not sound like a sensible strategy.

Nope, eBay will screw this one up badly.

And just like eBay, I tried Skype a while ago at the suggestion of a friend who swore by it. It was cool for about two weeks, and then it lost its panache very quickly, like a new health club membership. It definitely didn't deliver on its value proposition to me which I was told was “free phone calls forever.” Was it f*%$.

Another disillusioned former customer now feeling defrauded? (Except I didn't pay anything—however, I still felt cheated out of my time.)

Looking at Vonage, I like their future much better. While the press and sector in general has criticized it for their high cost of customer acquisition, they get a better calibre of customer (which I think is very important and generally under-rated in the Skype world of getting anyone to sign up and download the software regardless of their ability or desire to fork over cash) who pays more money over the long term and then becomes solidly profitable. Vonage has the distribution into the Enterprise sector too, which Skype can only sigh at in wonderment and continue searching for a revenue model and ways to conspire shaking money out of their customers.

Plus, Vonage has the benefit of being founded by Jeffrey Citron, a guy who unlike Zennstrom and Friis has already created a market-leading, disruptive business in Datek and sold it for a walloping $1.3bn to a happy buyer, Ameritrade which promptly built it into the fourth largest US online brokerage brand. (Here again my editor and I lock horns. But I am sure about this. Vonage will win this race. Skype with its phenomenal attraction to the peer-to-peer consumers cannot and will not survive in the Enterprise sector. This key market will define the victors as it has so many times before and then my editor will sound much less certain and much more sheepish.)

On the Skype side of the transaction, it's about time Zennstrom and Friis made some dough on their great paradigm-shifting P2P creations. When I spoke to Zennstrom a couple of years ago, he was on-the-run from the record industry speaking from undisclosed locations and acting like a hunted man. It was ridiculous, “give me a break,” I thought. Then in early 2004 the Fortune cover story on these two characters broke, “Catch Us If You Can” it blared providing all the media attention to these two techies that they could have ever wished for.

During this period and before, it was clear Zennstrom was desperate to get filthy rich like many of his propeller-head compatriots had before him and that he was troubled by not having done so. Having come up impecunious after the VC millions invested in the Kazaa phenomenon and missed their fat chance, these two were not going to be denied this time around to the money trough.

Nor were their VC's.

Some may applaud the Skype VC's “cleverness,” but I see a greed /integrity issue here.

In my conversations with strutting Skype VCs a few years ago, they admitted the lack of a serious revenue model and when pressed promised that they had one in the works. Just in the works? Well actually they promised, there is one already devised and ready to roll-out. So how does it work then? They refused to elaborate.

In the ensuing two years, I've failed to see any genuine - much less successful - revenue models for Skype to make bona fide cash flow a reality; so much for candor. $60m in revenues an absurdly low sum and pretty paltry when your price tag is upwards of $2.3bn. Now this becomes eBay's big, expensive problem.

Not too long ago, the VC line in the media represented the equivalent of “we're not selling Skype for any amount.” Wouldn't it be nice if you could trust what one of these people said? Am I hopelessly romantic and naïve in thinking their word should be their bond? Obviously these statements were just a negotiation tactic to drive the price up with the drooling eBay - the next possible buyer of one of this VC's portfolio companies had better beware; the barracudas are circling, negotiating deceitfully and nothing they say can be trusted.

And will eBay be a satisfied customer of these VC's and the Zennstrom / Friis itinerant gang? Will they in the long run come to think they got fair value for money?

Sadly not.

If Whitman was as clever as she's relentlessly portrayed in the tech media, she would have resisted the temptation (which I acknowledge was strong - but for the telecoms industry, not an auction house) to overpay for this P2P/VOIP phenomenon and left it to the telcos and mobile operators to either crush under their boot heels like the bothersome gnat it is, or begin a bidding war to buy it, strangle it and be done with any threat Skype represented.

So as events have left it now, the “Technology Gypsies,” Zennstrom and Friis become the next Brin & Page, perhaps coming out of their Salman Rushdie-like hiding to spread some of their hundreds of millions around the bars of Europe in celebration. Their VC's get an astronomical ROI for a two-year investment cycle, the jealousy of their counterparts in the “vulture capital” industry and the worrisome possibility that eBay execs will wake up some day soon to realize they've been had. These two groups come out smelling like a rose.

Coming out smelling like an organic matter of a different sort, will be eBay who loses by overpaying for the $60m-turnover Skype brand while their management and the eBay brand take an additional hammering when the cards are finally turned over.

The eBay customer loses when Whitman feels the heat to make this silly investment “perform” and starts getting desperate by pestering the eBay customer base with endless offers.

The Skype customer will lose in a multitude of possible ways, not the least of which comes when Skype is no longer “free,” said change coming very quickly indeed. They're going to have to “monetize” these freeloaders and do it promptly.

If this transaction goes bad in a big way, as I believe it will, then look for Whitman to be out on her ear faster than “HP Carly.” AOL Time-Warner will look like a good probability merger by comparison.

Regrettably, this acquisition looks to be the concrete confirmation that in Technology, at least for the time being, the inmates are still in charge of the asylum. ®